The basic premise of much of the fee war in the ETF industry has been that cost is king. The thinking runs that institutional investors worry that high fees will chip away at their returns. Having the lowest cost ETFs – it is thought – is therefore crucial in winning over institutional investors. And indeed, all evidence shows a correlation between low cost and inflows.
But first mover advantage matters just as much, if not more, our quick overview of ASX data suggests. In most segments of the market, where there are directly comparable products, it’s the first movers that get and stay the biggest. This is particularly true in the Australian and global plain vanilla space, which is where the guts of the money is in Aussie ETFs.
Why might this be?
Part of the reason is surely the liquidity snowball that comes with being first. Spreads are, after all, a cost no different to management fees. This is most obvious in the case of gold ETFs. The Perth Mint’s gold ETF (PMGOLD) is cheaper than ETF Securities’ (GOLD) product. However, PMGOLD’s spread is 4x wider than GOLD’s, meaning that any savings investors make on the lower fee are wiped out by the higher spread.
Another part of the reason is surely compound interest. Here the best example is perhaps STW, the first ETF listed in Australia. STW has been losing ground to VAS in flow terms for years. Yet STW, being first to market, has enjoyed dividend reinvestment for longer.